STOCK RESTRICTIONS AND LEGEND REMOVALS

RESTRICTIONS

Securities can be issued as unregistered (restricted) through private sales from the issuer. The resale of unregistered shares must qualify under an exemption to registration or safe harbor. By exempting many small offerings from the registration process, the SEC seeks to foster capital formation by lowering the cost of offering securities to the public. 

1. STANDARD RESTRICTION:

A standard restriction is placed on your stock if it is unregistered by the SEC. Some examples of this include private placement offerings, subscription agreement, venture capital deals, employee stock benefit plans, and compensation for professional services.

2. CONTROL PERSON OR AFFILIATE:

If a shareholder is considered an insider, control person, or an affiliate of an issuer, most exemptions require more extensive requirements to meet in order to sell the shares in the free-trading market.

3. REGULATION S

Regulation S is a safe harbor for US companies that want to sell their stock to foreign investors. Some key stipulations are that the securities must be sold in an offshore transaction without any direct selling efforts in the US stock market. Notably, shares offered for sale offshore under Regulation S are still considered restricted securities in the US even after resale. To learn more about Regulation S, check out the SEC’s Regulation S webpage.

Have specific questions about restricted stock? Visit the Restricted Stock section of our FAQ page.

4. LOCK UP AND LEAK OUT AGREEMENTS:

• A Lock-Up Agreement is a legally binding contract between the underwriters and insiders of a company prohibiting these investors from selling any shares of stock for a specified period of time. 
• A Leak Out Period is the time frame in which a shareholder has volume trading limitations placed on selling restricted stock. A leak out is over and above that which is prescribed for affiliates selling under Rule 144.

LEGEND REMOVALS

REGISTRATIONS AND EXEMPTIONS: In order to remove a restriction (legend) on shares, the shareholder must file under a registration or an exemption. Below are commonly used registrations and exemptions.

WHAT IS A REGISTRATION?

A Registration Statement is a filing that an Issuer can submit to the SEC to register shares that are being offered to the investing public. There are several types of registrations; the most common are S-1, S-3, and Regulation A.

The SEC reviews each registration and may request amendments to be made to the filing. When the registration is approved by the SEC, the shares listed are eligible to be resold by the shareholders. You may click here to review an issuer’s filings with the SEC. Note: Registrations can go stale. We recommend you contact the issuer to confirm if the registration is still valid.

1. RULE 144 RESALE SAFE HARBOR

Rule 144 is the most popular safe harbor that allows shareholders to sell unregistered stock in the public marketplace.

Rule 144 has a holding period requirement as well as several other requirements. A securities attorney will opine on whether the requirements of the Rule have been met.

A common misunderstanding about Rule 144 is that once a tacking period has been met, Rule 144 allows shares to simply become “free trading.”  There is no such thing as  “free trading” shares under Rule 144. The Rule is a transactional exemption that allows shares to be sold in the public once certain conditions are met. The process of removing the restrictive legend from a stock certificate is done only to facilitate a public resale, and in no way alleviates an investor from complying with all aspects of Rule 144 at all times.

RULE 144 LEGEND REMOVAL FORM

For removing the legend for a non-affiliate, keeping the shares in the same name and moving into your own brokerage account

RULE 144 LEGEND REMOVAL AND PRIVATE TRANSFER

For removing the legend for a non-affiliate to immediately transfer the shares to a different registration name

RULE 144 AFFILIATES LEGEND REMOVAL Packet

For affiliates removing the legend under Rule 144

2. SECTION 4(A)1 EXEMPTION

Section 4(a)1 is another commonly used exemption that is relied upon by shareholders of publicly traded companies.

Requirements:

Among other nuanced conditions, the key requirements for shareholders are that they must be a non-affiliate of the company, have acquired the shares for investment purposes (not as a broker, dealer, or underwriter), and have held the shares long enough that they "come to rest." The term "come to rest" is rather nebulous and subject to interpretation by securities counsel. Most attorneys consider a 1 or 2 year holding period as sufficient time to establish that the shares have come to rest.

3. REGULATION A+ REGISTRATION

Regulation A provides an exemption from registration for public offerings. 

Two Different Tiers:

• Tier 1 - Up to $20 million in a 12-month period 
• Tier 2 - Up to $50 million in a 12-month period

Requirements:

There are certain basic requirements applicable to both Tier 1 and Tier 2 offerings, including company eligibility requirements, bad actor disqualification provisions, and disclosures. Additional requirements apply to Tier 2 offerings, including limitations on the amount of money a non-accredited investor may invest in a Tier 2 offering, requirements for audited financial statements and the filing of ongoing reports. Issuers in Tier 2 offerings are not required to register or qualify their offerings with state securities regulators. 

To learn more about registering under the Reg A, check out the SEC’s Compliance Guide for Reg A.

4. S-1 REGISTRATION

SEC Form S-1 is a registration type under the Securities Act of 1933 for new securities.

Companies may file a Form S-1 for their initial public offering (IPO). A few of the requirements for this filing include providing the plans for use of capital, details of the current business model and a prospectus.